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The Role of Liquidity Providers in The Stock Market


A liquid asset such as a security if it can easily be converted into cash. If the majority of shareholders want to sell, if company news is bad, or if they buy when they are good, the value of shares will be very volatile because of the selling and buying prices go up or down quickly. Then it will be difficult to complete the transaction - then the security will no longer be liquid. Liquidity meaning in accounting is the company's ability to convert its assets into cash to pay off debt when they owe. According to the Securities and Exchange Commission, market makers generally must be prepared to buy and sell at least 100 shares where they trade. As a result, large investor orders may need to be carried out by several market markets. Manufacturers with prices that may be different.

The Role of Liquidity Providers in The Stock Market

Liquidity Provider

The liquidity provider or market maker holds a large number of the company's shares. This allows him to complete buy and sell orders from the broker, provided the price is in the range that he considers acceptable. In this way, stock liquidity increases by making quick and simple transactions - and stabilizing the market by reducing dynamic fluctuations in buying and selling prices. By allowing or holding back trades, it has a strong impact on the stock market price.

Selecting a liquidity provider

When a company issues an IPO or another stock issue, it must choose the market vendor/liquidity provider carefully. The company selected must meet high standards of reliability, honesty, and integrity. It must also be very visible, with a website that is easy to find, navigate and high-quality online services. Dishonest market makers can manipulate markets to their advantage and cause serious harm to their customers. Care in choosing a manufacturer in the market is very important.

Who are market makers?

Anyone can become a market maker/liquidity provider as long as they meet the requirements. While banks, brokers and other well-known financial institutions, individuals can also qualify. It is important to fulfill the basic requirements for broker registration and licensing and to demonstrate the ability to fulfill the minimum commercial functions of the market maker. Each stock exchange has its standards and requirements for registering as a market maker. In general, however, the market maker must be prepared to buy or sell at least 100 shares that he trades.

What is the importance of market makers?

Market makers are important to maintain the structure of the stock market and to ensure a smooth flow of orders. The importance of market producers cannot be questioned because they have much-needed liquidity. For example, this research paper provides strong evidence for market makers who provide more stability in the market. The appointment of market makers on the stock exchange is more important than before because the market structure continues to change.

The importance of market makers also arises in markets where fewer liquid securities are involved. The topic Market Maker appears when the market collapses. When liquidity subsides and many players are exposed, authorities have proposed strict regulations for market makers. The most important aspect is that market makers provide liquidity in times of market pressure. Although it plays an important role, algorithmic or high-frequency trading is one of the makers of traditional markets. With the growth of trade automatically comes the aspect of liquidity which contributes to stabilization.

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